Market Place; Surprising Profits Of Futures Funds

By H. J. Maidenberg

Published: February 6, 1991

SPECULATORS in commodity futures are a curious lot. They make contracts either to buy goods they do not want or to sell goods they have no intention of delivering.

In either case, the overwhelming majority of individual speculators in commodity futures share a common experience: despite the large profit potential in their highly leveraged trading, they lose money. The leverage results because the initial cash outlay required to buy or sell a futures contract is less than 10 percent.

Despite these dismal odds, many futures speculators are reluctant to invest in commodity funds because the record of those funds is even more abysmal than the experiences of individuals.

While all this is hardly news to the commodity trading fraternity, many people have been surprised by the uncommonly large profits many publicly offered commodity funds made last year.

Based on the Norwood Index, the most respected measure of such funds' performance, the 135 publicly offered funds produced an aggregate profit of 17.7 percent in 1990, compared with a loss of 5 percent in 1989. In dollar terms, 1990 ended with a gain of $395 million on total equity of $3 billion. There are many other commodity funds, however; the Norwood Index surveys only those that agree to full disclosure of operating results.

"The results for 1990 have been astounding, given the past track record of commodity funds," said Daniel B. Stark, who heads a research firm bearing his name in Palatine, Ill. Mr. Stark now monitors the Norwood Index, which was createdyears ago as a research project by Jay Klopfenstein, who still heads the Norwood Securities Corporation of Chicago, a brokerage house that has never been involved in commodity trading.

Mr. Stark attributed the gains to profits that most funds made from trading currency futures in a year when the dollar was under pressure. "From our study of the trading records, it also seems that the trend followers did quite well," he said.

The big trend in futures in 1990, one that has continued this year, was the steady erosion of prices of both farm and industrial commodities, because of the growing worldwide recession. As the recession became pronounced last fall, interest rates began to decline steadily, which continues to benefit the followers of the trend in financial futures.

In any case, the profits of the monitored funds in 1990 stand in sharp contrast to the results of past years. For many years, transaction costs and other expenses chewed up whatever profits the funds made. The best shareholders could hope for was the common practice of dissolving a fund once it lost 50 percent of its assets, distributing what was left to shareholders.

The poor overall performance of commodity funds, as compared with stock mutual funds, has led many in the industry to experiment with all kinds of trading practices. Perhaps the most successful to date has been that developed through trial and error by the Commodities CorporationU.S.A. of Princeton, N.J., in 1969.

As a result, Robert G. Easton, president and chief executive of the Commodities Corporation, expects the management of commodity funds to undergo a complete change in coming years as more funds and managed accounts emulate his company's system.

"The basic problem was just as apparent in 1969 as it is now," Mr. Easton said. "Those who trade commodity futures, as well as those who invest in funds, have the cards stacked against them. Why? For one, the average futures broker depends on commissions for the bulk of his income." Another, more recent problem, he said, is that research departments have been cut back, "the first casualty of the brokerage industry's drive to cut overhead at a time of shrinking profits."

The founders of the Commodities Corporation, who include Paul Samuelson, the Nobel laureate in economics who is still active in the company, believed that a different breed of futures broker had to be developed, along with a new set of trading controls and practices.

The Commodities Corporation, for example, uses more than 160 independent traders to trade futures for its public funds, which are distributed through various brokerage houses. It also manages the accounts of wealthy individual speculators, and it services insurance companies, pension funds and other institutions that increasingly hedge their investments in the futures market.

"We don't care if the trader we use operates from a yacht on the French Riviera or from a cabin in Alaska or from the floor of one of the commodity exchanges," said Barry I. Bregman, vice president-human resources of the Commodities Corporation. "All we are interested in is the trading profits -- not commissions -- they produce for our various funds and clients."